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Restructuring RX Ultimate Exam
Question 1. Which of the following best distinguishes operational distress from financial distress? A) Declining sales versus high leverage B) Asset write‑downs versus covenant breaches C) Business model failure versus over‑leveraged balance sheet D) Liquidity crunch versus market share loss Answer: C Explanation: Operational distress stems from a failing business model, while financial distress is caused by an excessively leveraged balance sheet. Question 2. A “grave period” in distressed analysis refers to: A) The time until the next debt maturity B) The period when EBITDA turns negative C) The cash runway until cash balances reach zero D) The interval between filing and plan confirmation Answer: C Explanation: The grave period measures how long a company can operate before cash is exhausted. Question 3. Which trigger is most likely to initiate a restructuring (RX) process? A) A new product launch B) A covenant breach on a term loan C) An increase in market share D) A strategic acquisition Answer: B Explanation: Covenant breaches directly signal financial strain and often precipitate restructuring. Question 4. In a distressed scenario, the “Restructuring EBITDA” is calculated by: A) Adding back non‑recurring professional fees to GAAP EBITDA B) Subtracting interest expense from operating profit
Restructuring RX Ultimate Exam
C) Including one‑time gains from asset sales D) Excluding depreciation and amortization only Answer: A Explanation: Normalizing EBITDA removes one‑time professional and distressed costs to reflect sustainable earnings. Question 5. The party that typically convenes the creditor committee in a Chapter 11 case is: A) The debtor’s CEO B) The U.S. Trustee C) The largest unsecured creditor D) The court‑appointed examiner Answer: C Explanation: The largest unsecured creditor often leads the formation of an ad hoc creditor committee. Question 6. Under the absolute priority rule, which claim rank is highest? A) Senior secured bank loan B) Subordinated debenture C) Super‑priority DIP loan D) Common equity Answer: C Explanation: DIP financing receives super‑priority status above all pre‑petition claims. Question 7. Structural subordination occurs when: A) A lender’s security interest is junior to a senior lien on the same assets B) Debt is issued by a HoldCo but the cash‑flow source is an OpCo C) A covenant is breached but no default is declared D) A bond has both maintenance and incurrence covenants
Restructuring RX Ultimate Exam
Explanation: The fulcrum security sits at the point where the capital structure’s value just covers its claim, often converting to equity. Question 11. An exchange offer that swaps existing debt for new debt with a lower interest rate is primarily used to: A) Increase the company’s cash balance B) Reduce interest expense and extend maturities C) Convert debt to equity immediately D) Trigger a default under the original bonds Answer: B Explanation: Swapping for lower‑coupon, longer‑dated debt eases cash‑flow pressure. Question 12. A consent solicitation typically seeks to: A) Obtain court approval for a DIP loan B) Secure lender waivers of default or covenant amendments without court involvement C) Force a creditor class into a cram‑down D) Issue new equity to existing shareholders Answer: B Explanation: Consent solicitations are out‑of‑court tools to get creditor agreement on amendments. Question 13. In a tender offer, the discount to par paid to retire debt reflects: A) The market value of the debt B) The original issuance price C) The seniority of the claim D) The tax shield from interest expense Answer: A Explanation: The discount approximates the current market price, allowing the debtor to retire debt cheaply.
Restructuring RX Ultimate Exam
Question 14. “Dropdown” transactions, as seen in the J. Crew maneuver, involve: A) Moving assets into an unrestricted subsidiary to issue new senior debt secured only by those assets B) Converting all debt to equity in a single step C) Selling non‑core assets at fire‑sale prices D) Adding a new senior lien on existing assets without restructuring Answer: A Explanation: Dropdowns relocate assets to a clean subsidiary, enabling fresh senior financing insulated from existing claims. Question 15. “Uptiering” in a liability management exercise is designed to: A) Increase the overall leverage of the company B) Allow a majority of lenders to roll into a new senior tranche, subordinating the minority C) Convert all junior debt into equity D) Reduce the coupon on all outstanding bonds uniformly Answer: B Explanation: Uptiering creates a new senior class by aggregating willing lenders, leaving dissenting lenders in a lower‑ranked position. Question 16. A make‑whole provision in a bond indenture typically requires: A) Immediate repayment at par upon early retirement B) Payment of a premium equal to the present value of missed future interest C) Conversion of the bond into equity at a fixed ratio D) No additional payment beyond principal Answer: B Explanation: Make‑whole provisions compensate investors for lost future interest when debt is retired early.
Restructuring RX Ultimate Exam
A) 10‑15%
B) 30‑40%
C) 60‑70%
D) 90‑100%
Answer: C Explanation: Senior secured creditors historically recover 60‑70% of face value, reflecting the value of collateral. Question 21. In a Chapter 11 filing, the “automatic stay” prohibits: A) All shareholder voting on the reorganization plan B) Creditors from pursuing collection actions without court permission C) The debtor from filing any new debt D) The court from issuing any orders Answer: B Explanation: The automatic stay freezes creditor collection activities pending bankruptcy proceedings. Question 22. First‑day motions in a Chapter 11 case commonly seek to: A) Approve the final plan of reorganization B) Obtain DIP financing and fund payroll C) Dissolve the debtor’s board of directors D) Transfer assets to a third party without court approval Answer: B Explanation: First‑day motions typically address immediate financing needs, including DIP loans. Question 23. A DIP loan’s “super‑priority” status means: A) It ranks ahead of all pre‑petition secured and unsecured claims B) It is subordinate to senior secured lenders
Restructuring RX Ultimate Exam
C) It receives the same treatment as equity holders D) It must be repaid before any cash‑flow generation Answer: A Explanation: DIP financing is placed at the top of the capital structure to ensure lenders are repaid first. Question 24. Section 363 sales are attractive because they: A) Require full court approval for each asset sold B) Allow assets to be sold “free and clear” of liens, often quickly and at market value C) Convert all assets into new equity automatically D) Preserve the debtor’s existing debt covenants Answer: B Explanation: Section 363 sales enable rapid, lien‑free disposition of assets, maximizing value. Question 25. In a reorganization plan, an “impaired” class is one that: A) Receives 100% of its claim value B) Receives less than the present value of its claim C) Votes unanimously in favor of the plan D) Is exempt from the cramdown test Answer: B Explanation: An impaired class suffers a reduction in recovery relative to its claim’s present value. Question 26. The voting threshold for a class to approve a Chapter 11 plan is: A) 50% in number and 66.7% in amount of claim holders in that class B) 75% in number and 90% in amount C) Simple majority in both number and amount D) Unanimous consent of all creditors Answer: A
Restructuring RX Ultimate Exam
Question 30. In negotiations between Term Loan A holders and high‑yield bondholders, a common point of contention is: A) The color of the debtor’s logo B) The ranking of a new senior tranche in an uptiering C) The location of the debtor’s headquarters D) The choice of legal counsel for the debtor Answer: B Explanation: Different creditor groups often dispute how a new senior tranche will affect their relative ranking. Question 31. Game theory explains the “holdout problem” in exchange offers as: A) All creditors eagerly accept the offer B) Some creditors refuse, hoping for a better deal, potentially jeopardizing the transaction C) The debtor can force acceptance through a court order D) The market price of the debt rises after the offer Answer: B Explanation: Holdouts may block a deal, seeking higher recovery, creating a coordination problem. Question 32. The “prisoner’s dilemma” in restructuring negotiations illustrates that: A) Cooperation leads to the worst outcome for all parties B) Individual rationality may lead to a collectively sub‑optimal result C) The debtor always benefits from refusing a deal D) Creditors can always force a cramdown Answer: B Explanation: Each party acting in self‑interest may prevent an agreement that would be better for all.
Restructuring RX Ultimate Exam
Question 33. When analyzing liquidity versus solvency, a company is considered solvent if: A) Its cash runway exceeds 12 months B) Its assets exceed its liabilities on a balance‑sheet basis C) It has positive EBITDA D) It can meet its next covenant test Answer: B Explanation: Solvency refers to the balance‑sheet ability to meet obligations, not just cash flow. Question 34. PIK interest impacts the financial statements by: A) Reducing cash flow but increasing cash on the balance sheet B) Increasing cash flow and decreasing debt C) Adding to interest expense on the income statement and increasing debt on the balance sheet without cash outlay D) Being recorded as equity Answer: C Explanation: PIK accrues interest that is capitalized as additional debt, affecting both the income statement and balance sheet. Question 35. In a three‑statement model, a debt‑for‑equity swap will: A) Increase cash, decrease assets, and increase equity B) Decrease long‑term debt, increase common equity, and have no cash impact C) Increase operating cash flow D) Reduce both assets and liabilities equally Answer: B Explanation: Swapping debt for equity reduces liabilities and raises equity without affecting cash. Question 36. The “face value” of a debt instrument represents: A) The market price at which it trades
Restructuring RX Ultimate Exam
Answer: B Explanation: Consent solicitations aim for out‑of‑court modifications with creditor approval. Question 40. Which of the following best describes an “unrestricted subsidiary” used in a dropdown maneuver? A) A subsidiary that remains subject to all existing liens B) A subsidiary whose assets are free of the parent’s existing security interests, allowing new senior debt issuance C) A subsidiary that cannot issue any new debt D) A subsidiary that is automatically liquidated in bankruptcy Answer: B Explanation: Unrestricted subsidiaries hold assets not encumbered by existing liens, enabling fresh senior financing. Question 41. In a liquidation analysis, the “forced liquidation value” is typically: A) Higher than the orderly liquidation value B) Equal to the book value of assets C) Lower than the orderly liquidation value due to fire‑sale discounts D) Determined by the debtor’s management Answer: C Explanation: Forced liquidation assumes assets are sold quickly at distressed prices, yielding lower proceeds. Question 42. An “intercreditor agreement” primarily governs: A) The relationship between the debtor’s board and shareholders B) The rights and priorities among different creditor classes C) The terms of a new equity issuance D) The staffing of the bankruptcy court Answer: B
Restructuring RX Ultimate Exam
Explanation: Intercreditor agreements set out priority, voting, and payment rules among creditor groups. Question 43. The “cash‑flow waterfall” in a bankruptcy plan allocates cash in what order? A) Equity, then secured debt, then unsecured debt B) Senior secured debt, then junior secured, then unsecured, then equity C) Unsecured creditors first, then senior secured D) All classes share cash proportionally Answer: B Explanation: Cash is distributed according to the priority hierarchy, starting with senior secured claims. Question 44. When calculating a make‑whole premium, the discount rate used is usually: A) The bond’s original coupon rate B) The current risk‑free rate plus a spread reflecting the bond’s credit risk C) The company’s historical cost of capital D) Zero, because the premium is a fixed amount Answer: B Explanation: The premium reflects the present value of missed interest, discounted at a rate appropriate to the bond’s risk. Question 45. A “covenant breach” that does not result in an event of default is known as a: A) Technical default B) Cross‑default C) Accrual breach D) Cure period violation Answer: D Explanation: Many covenants include a cure period allowing the debtor to remedy the breach before default occurs.
Restructuring RX Ultimate Exam
Question 49. A “super‑priority” claim in a Chapter 11 case is granted by: A) The debtor’s board of directors B) The Bankruptcy Court, often for DIP financing C) The U.S. Securities and Exchange Commission D) The Federal Reserve Answer: B Explanation: Courts can grant super‑priority status, commonly to DIP lenders, to ensure financing. Question 50. The “cash‑runway” of a distressed firm is calculated by: A) Dividing cash on hand by total debt B) Dividing cash on hand by monthly cash burn C) Multiplying EBITDA by the debt‑to‑EBITDA ratio D) Adding cash flow from operations to cash on hand Answer: B Explanation: Cash‑runway measures how many months the firm can continue operating before cash is exhausted. Question 51. In a “secured loan,” the lien is said to be “first‑in‑first‑out” because: A) It receives interest payments before any other claim B) It has priority over later‑filed liens on the same collateral C) It can be converted to equity at any time D) It is automatically forgiven after a certain period Answer: B Explanation: First‑in‑first‑out means earlier‑recorded liens have priority over subsequent ones on the same asset. Question 52. The “principal‑only” portion of a DIP loan is: A) The interest accrued on the loan
Restructuring RX Ultimate Exam
B) The amount that must be repaid before any other claims receive payment C) The portion that can be converted into equity at the debtor’s discretion D) The fees paid to the DIP lender Answer: B Explanation: DIP principal must be repaid before other creditors under the super‑priority claim. Question 53. Which of the following best describes “structural subordination” in a holding‑company debt structure? A) The HoldCo’s debt is senior to OpCo’s debt because of the parent‑subsidiary relationship B) The HoldCo’s debt is subordinate because cash flows must first satisfy OpCo’s obligations C) Both HoldCo and OpCo debt have equal claim on assets D) Structural subordination only applies to equity, not debt Answer: B Explanation: HoldCo debt is structurally subordinate as cash must flow through OpCo before reaching HoldCo creditors. Question 54. In a distressed DCF, the terminal value is often calculated using: A) A perpetuity growth rate of zero B) The same growth rate as the historical GDP C) The same WACC as used for the forecast period without adjustment D) A high-growth multiple to reflect turnaround potential Answer: A Explanation: A zero‑growth perpetuity is conservative for distressed firms, avoiding unrealistic terminal growth. Question 55. The “cramdown” test requires that a plan be “fair and equitable” to a dissenting class. Which of the following would violate this test? A) The dissenting class receives a recovery equal to the present value of its claim B) A junior class receives more than a senior class
Restructuring RX Ultimate Exam
Explanation: Proceeds are distributed according to claim seniority, starting with secured creditors. Question 59. In a “make‑whole” calculation, the premium is usually expressed as: A) A fixed dollar amount per $1,000 of principal B) A percentage of the bond’s coupon rate C) The present value of missed interest payments over the remaining term D) The market price of the bond at the time of retirement Answer: C Explanation: The premium equals the discounted value of the interest the bondholder would have earned. Question 60. The “first‑day motion” to obtain a “debtor‑in‑possession” (DIP) loan typically includes a request for: A) A permanent financing arrangement B) A super‑priority lien on all of the debtor’s assets C) A shareholder vote on the plan D) An amendment to the debtor’s articles of incorporation Answer: B Explanation: DIP lenders demand a super‑priority lien to protect their investment. Question 61. Which of the following is a hallmark of a “forced liquidation” scenario? A) Sale of assets at market‑based multiple B) Use of a Section 363 sale process C) Immediate conversion of debt to equity D) Distribution of cash proceeds to equity holders first Answer: B Explanation: Forced liquidation often employs a Section 363 sale to quickly liquidate assets.
Restructuring RX Ultimate Exam
Question 62. In a “binding tender offer,” the offeror must: A) Provide a minimum of 100% of the outstanding debt for acceptance B) Allow the debtor to retain all of its assets C) Pay cash (or cash equivalents) to the participating creditors at a specified discount D) Issue new senior notes to replace the old debt Answer: C Explanation: Tender offers involve paying cash at a discount to retire selected debt. Question 63. The “priority of claims” hierarchy places which of the following directly above unsecured senior notes? A) Common equity B) Subordinated debentures C) Super‑priority DIP loans D) Preferred equity Answer: C Explanation: DIP loans are super‑priority, ranking above all pre‑petition claims, including unsecured senior notes. Question 64. In a “dropdown” transaction, the new senior debt is typically secured by: A) The same assets that back the existing senior secured loan B) Unrestricted assets held in a newly created subsidiary C) The debtor’s goodwill and intangible assets D) The equity of the parent company Answer: B Explanation: Dropdowns use assets moved to an unrestricted subsidiary to back new senior debt. Question 65. The “make‑whole” provision is most relevant when a company: A) Issues new equity to fund operations
